HISTORY OF BANKING

Banks are said to be the oldest and most familiar financial institutions. It was
derived from Banco (Latin), Banque (French) or Banc which mean a bench or
money exchange table.
- It is a bench where merchants and lenders of money transact their
business, upon which the mediaeval European money lenders and money
changers used to display their coins.
- At that time a group of people used to conduct business of transaction of
money sitting on a stool or bench.
- Evolution of commercial banking is related to the practice of safe-keeping of
gold and other valuables by the people with merchants/goldsmiths/money-
lenders
The first modern bank was the Bank of England in 1694.
EVOLUTION OF THE BANKING SECTOR IN TANZANIA
The evolution of banking sector in Tanzania can be broken down into three main
phases.
a. colonial era, and the period before Arusha Declaration of 1967,
b. post Arusha Declaration and the period prior to 1991, and
c. The period after 1991 up to date.
COLONIAL ERA AND THE PERIOD BEFORE ARUSHA DECLARATION IN 1967
The development of the banking sector started way back in the early
1900s.Commercial banks were the dominant financial institutions in the then
Tanganyika. During the German rule there were two commercial banks established
in Tanganyika, namely:
o the Deutsche Ostafrikanische Bank (1905)
o Handels bank fur Ostafrika (1919)
These banks were mainly for serving colonial rulers and a few businesses. After
World War I in 1918, the British took over the control of the country from the
Germans.
Three commercial banks were established in order to replace the German banks.
These banks were:
a. the National and Grind lays Bank,
b. the Standard Bank
c. The Barclays Bank D.C.O.
In the early 1950s, other banks from India opened branches in Tanganyika. These
were: Bank of India and The Bank of Baroda, which opened branches in Dar es
Salaam, Moshi and Mwanza.
By the time of independence in 1961, the country’s banking industry was comprised
of the following
• Standard Bank of South Africa, National and Grindlays Bank, Barclays Bank
DCO, Ottoman Bank, Bank of India, Bank of Baroda, Commercial Bank of
Africa, and The National Bank of Pakistan.
• During the colonial period there was no
Central Bank and the EACB used to act
as the Central Bank by controlling over
the supply of currency. Originally, EACB operated in EA. In 1965 the decision
by the East
African authorities was to stop the functions of EACB and establish separate
Central Banking Tanzania, Kenya, and Uganda.
• The Bank of Tanzania Act, 1965,
was passed by the National Assembly in December 1965, and the Bank was
opened by the first President of Tanzania Mwalimu Julius K. Nyerere on June
14, 1966.
• Following the Arusha declaration of February 1967, all commercial banks in
Tanzania, with the exception of National Cooperative Bank(NCB) and the
Peoples
of Bank of Zanzibar(PBZ),were nationalized
Post Arusha Declaration and the Period Prior to 1991
In 1967, following the Arusha Declaration, all private commercial banks were
nationalized and their assets and liabilities were merged resulting into the
establishment of one big commercial bank, namely the National Bank of
Commerce (NBC)
• The period after the Arusha Declaration was marked by rapid development of
non-bank and development financial institutions.
- Tanzania Investment Bank (TIB) was established in 1970; Tanzania Rural
Development Bank (TRDB), was established in 1972;
• The NBC was restructured in 1997 and three separate entities were formed,
namely:
• NBC (1997) Limited,
• the National Microfinance Bank Limited
• Consolidated Holdings Corporation.
• The Cooperative and Rural Development Bank was also restructured into a
private bank in 1996 and renamed CRDB (1996) Bank Limited. This bank later
changed its name to CRDB Bank PLC
• The situation is now different
• Commercial banks – 34 , Development banks – 2, Microfinance banks – 5,
Community banks – 5
THEORES OF BANKING
1. Financial intermediation theory:
This theory sees banks as intermediaries between savers and borrowers. Banks
collect funds from savers and channel them to borrowers, earning a spread on the
interest rate in the process. This intermediation function reduces the transaction
costs of borrowing and lending, making it easier for savers and borrowers to find
each other. The financial intermediation theory of banking is based on the theory of
informational asymmetry (In the relationship between bank and borrower, and
bank and depositors) and the agency theory
2. Credit Creation Theory of Banking
A bank’s ability to create new money, which is referred to as ‘credit money’, is a
result of a range of factors; Banks’ ability to create credit money arises from
combining lending and deposit taking activities
3. Fractional reserve banking theory:
This theory states that banks hold only a fraction of their deposits in reserve,
lending out the rest. The amount of reserves required by law is typically much less
than the total amount of deposits, allowing banks to create money by lending out
more than they have in reserves. The amount of money that banks are required to
hold back is set by the Central Bank as a percentage of total deposits and the
Central bank changes the reserve requirement periodically to ensure the safety of
the banking system as well as to influence the money supply.

A BANK
According to BAFIA 2006
• Bank refers to an entity that is engaged in the banking business (Section 3 of
BAFIA 2006).
• Whereas: Banking business means the business of receiving funds from the
general public through the acceptance of deposits payable upon demand or after a
fixed period or after notice.
TYPES OF BANKS
1. Central Bank, 2. Commercial Banks, 3. Community Banks, 4. Microfinance Banks,
5. Development Ban
Functions of Banks in an Economy
Generally, these functions are classified into two categories;
• Primary functions, and Secondary functions.
Primary Functions:
1. Acceptance of Deposits
Deposits accepted by banks fall into two categories;
  Demand deposits, and
 Time deposits. - deposit which are repayable on a fixed date or after a
period of notice. Such deposits include Fixed Deposits and Short Term
Deposits.
2. Grants of loans
A bank lends out money in the form of loans to those who require it for different
purposes.
Banks operate as financial intermediaries placing themselves between ultimate
lender and ultimate borrower

Secondary Functions
Banks also carry out other functions termed as secondary or auxiliary functions,
these are of two types;
Agency Services
 Colleting and payment of cheques
 Buying and selling of the securities
 Trustee and Executor services
 Collection and payment of bills
 Standing instructions
General or Miscellaneous Services
 Advisory services
 Safe custody of valuables

TRANSFORMATION OF BANKING BUSINESS

Transformation of the banking business facilitated the change from traditional
banking to modern banking
TRADITIONAL BANKING - Traditional banking refers to the conventional banking
system that has been in place for many years. It involves physical branches and
face-to-face interactions between customers and bank employees.
• Characterized by:
a) Limited products and Services
b) Majority of their income are derived from lending business (Net interest
Margin)
c) Competition is restricted
d) Paper-Based Transactions
e) Supply led
CONTRIBUTORY FACTORS FOR THE TRANSFORMATION
a. Financial deregulation and re-regulation

b. Technological advancement

c. Changes in customers demand

d. financial liberalization-globalization

e. Increase of wealth of individuals

MODERN BANKNG - Modern banking refers to the use of technology and digital
platforms to offer banking services. Is use of technology and innovation to compete
with traditional financial methods in delivery of financial services, online and mobile
banking are prominent examples of modern banking
Characteristics of modern banking
1. Digital Platforms: Modern banks offer online banking platforms and mobile
applications that allow customers to access their accounts, perform
transactions, and manage finances from anywhere at any time using
internet-connected devices.
2. Electronic Transactions: such as online transfers, digital payments, and
mobile wallets.
3. Universal products and services
4. Generate their income from net income, fee and commission
5. Demand led, creating value for customers

DEVELOPMENT IN MODERN BANKING

a) Visual banking -Without any physical branch locations which provide

financial services
b) Private Banking
c) Islamic banking
d) Banc assurance

SERVICE DELIVERY CHANNELS

Delivery channels are means or ways of offering services to the customers.
 Traditionally, banks services were only available over the counter of the bank or
branch of the bank where a customer maintains an account. In the banking
sector, Alternate Delivery Channels are channels and methods for providing
banking services directly to the customers.

Growing Importance of Channels

a) Reach out to new customers
 b) Reach out to remote geographies

c) Deliver new products

d) providing faster processing through cost effective solutions

e) Data collection and mining

Channel Effectiveness
 Availability -The channel should be readily available to customers;

 Location

 Time example, 24/7 ATM access, 24/7 Internet Banking access,

Extended 8 to 8 branch access

 Simplicity -Technology should be simple and user-friendly, Customer should

feel comfortable with the technology; Simpler process for authentication and
Verification example Regional language ATMs

 Reliability -Expected service levels to be always met, Customer confidence

must be built over a period of time

 Consistency -Need to provide integrated platform that can accept

information from various other platforms used by various product groups of
the Bank

 Value-added services -Channels must continuously strive to add greater

value to customers in terms of services